I acknowledge the traditional owners of the land on which we meet, the Gadigal people of the Eora Nation and pay my respects to elders past, present and emerging.

Thanks for the invitation to be with you today.

I addressed my first FSC Annual Conference in 2007, as Shadow Assistant Treasurer. And Ive been back plenty of times since in various capacities.

And more important than the conferences has been the ongoing two-way engagement. My door is always open to the FSC and yours is always open to me for good discussions about a range of important issues.

We dont always agree, but we are always frank, open and respectful of each others role and perspective.

And just as this was the case last time Labor was in government, I would intend it to be the case for Labor Government, in my capacity as Treasurer.

Now usually at events like this, an Opposition speaker will give government a character assessment and, for no extra charge, a long litany of government failings and malfeasance.

Theres no doubt I could do that today!

But I dont intend to.

Instead, I intend to focus on a positive agenda for what I expect will be the next Government, the Shorten Labor Government.

Weve been an opposition that is prepared to be adventurous in policy terms, thinking big things and taking political risks.

We do this, because the task before us if we win the next election will be substantial, and we want a mandate to do big and important things.

Today, I want to focus on two areas: The need to examine our financial and prudential regulation architecture as part of our Royal Commission into banking and financial services and the need to ensure our financial services industry has the right policy settings in place for maximum export performance.

To the first point.

As you know, the Labor Party has committed to holding a Royal Commission into banking and financial services on coming to office.

I understand not everyone in this room would be wildly in favour of this policy.

But it is justified. No-one can defend and I have not seen any bank try to defend the sorts of poor industry practices which have led to successive scandals.

The scandals have had real victims, who suffered not only financial losses, but trauma, sometimes family breakdown and ill-health.

As my colleague Katy Gallagher pointed out last week, over the last 18 months alone there have been more than $300 million in fines imposed or compensation paid to customers by the banks for a range of bad behaviours such as bas credit practices or wrongly denying insurance claims.

And its not good enough to simply say the scandals have been unacceptable or regrettable.

We need to ensure the regulatory, policy and frankly cultural settings are in place to ensure that, to the maximum extent possible, they are not repeated.

Its fair to conclude that the very prospect of the Royal Commission has brought about some change of behaviour.

There is no way we would have seen a banking misconduct package brought down in the budget without Labor having promised a Royal Commission, for example and the ABA has started processes to deal with things like remuneration encouraging poor behaviour which should have been dealt with years ago.

But the prospect of Royal Commission isnt enough to bring about the necessary degree of change. A Royal Commission itself is required to do that.

But today, I want to flag something related but different that our Royal Commission into banking and Financial Services will need to deal with: the evolving architecture of our financial and prudential regulation.

I want the Royal Commission to recommend what is necessary to stop banking scandals, but also given our changing circumstances in Australia in recent years, that roles and accountabilities of our regulatory authorities remain transparent and continue to be properly understood and scrutinised.

I am not proposing another full blown inquiry into the operation of our financial system this was done recently but that the Royal Commission deal with developments in financial regulation more broadly, and wont just be in relation to poor behaviour.

It will be a prudent and timely examination of our financial regulation architecture.

It has been more than twenty years since the Wallis Inquiry made recommendations regarding our regulatory architecture, including the establishment of APRA and ASIC.

Responsibility for the prudential regulation of banks was taken out of the RBA, which retained responsibility for monetary policy that is, macroeconomic stability and financial system stability. ASIC has had responsibility for market conduct.

The Financial Systems Inquiry released 2 years ago, which was a serious body of work, didnt find a need to make any recommendations for change at that time.

But lets take a moment to consider what has changed since David Murrays Committee report.

Given what has changed over the last couple of years and even in the last twelve months alone, the time is ripe for a proper, considered and comprehensive examination of our institutional arrangements of the financial system architecture.

This is not a conclusion I have reached lightly. I have enormous respect for our financial and prudential regulators and will continue to do so.

But having considered the state of our financial architecture very carefully and deeply there are three reasons I have reached the conclusion that the Royal Commission on banking will be an important opportunity to consider our financial regulatory architecture, particularly issues around transparency of roles and accountabilities and that there is enough public scrutiny of these changing roles as they are occurring.

These three reasons are:

• The increased level of household debt in Australia, particularly relative to incomes.
• The ad hoc nature of changes that have occurred in financial and prudential regulation in Australia in the last few years
• And three, the rise of Fintech and its implications for financial regulation.

Let me deal with each of these in turn.

It is vital that Australias regulatory settings are fit for purpose, and that the changing roles and responsibilities of our regulatory agencies are well understood given the risks that are inherent with a highly indebted household sector.

I am very careful with my language as I broach this subject. I am not alarmist, or overly pessimistic, but we must always be realistic about the risks in the Australian economy.

There is much focus on public debt in Australia. Fair enough, peaking at 20% of GDP, net Federal Government debt is the highest its been since World War II.

However we are at the lower end of the pack when it comes to international league tables for public debt.

The same cant be said for our household debt.

Like most comparable countries, household debt increased in Australia in the lead up to the GFC.

But unlike say the US and UK, which have reduced their household leverage levels since then, ours has continued to increase strongly over recent years.

US and UK household debt to disposable incomes is now down to 112% and 150% respectively, well down on the peaks they experienced in the lead up to the GFC.

But Australias household indebtedness has gone in the other direction with an investor led property boom playing a major role. We are going against international trends, and in the wrong direction.

The most recent OECD data shows Australias household debt to net disposable income hit 212% in 2015 and has continued its ascent since then.

Australia is now amongst the highest of all advanced nations when it comes to the indebtedness of households a proportion of the economy.

Bank of International Settlements data shows that Australias households debt to GDP is now worth 123% of GDP. Only Switzerland has a higher percentage at 128%.

To put this into perspective, the average for advanced economies is around 75% of GDP.

Indeed, our regulatory agencies themselves, most notably the Reserve Bank have indicated that high leverage rates cause them concern.

No doubt something spurred on by tax concessions like negative gearing and capital gains tax which encourages leverage.

The RBAs recent financial stability review concluded that vulnerabilities related to household debt and the housing market more generally have increased.

As former RBA Governor Glenn Stevens said in 2012 in the RBAs report on Property Markets and Financial Stability when it comes to property prices, Its actually the leverage that matters.

Particularly for property because of the sheer size of the housing market, the importance it plays in underpinning the ability of households to spend, and the interconnections between the housing market and the broader financial system particularly the banks.

Indeed Philip Lowe was quite explicit, saying recently that while our banks are well capitalised, his overall assessment is that the recent increase in household debt relative to our incomes has made the economy less resilient to future shocks.

But its also the composition of the property market investors versus owner occupiers and how it might behave in the event of a downturn.

As the RBA has noted in previous speeches there is one aspect of systemic risk that makes property markets especially important for financial stability, it is pro-cyclicality.

There have also been over the last few years, numerous developments in financial and prudential regulation which, while all acceptable, are occurring in an ad hoc fashion, at least to the public eye.

Take APRA for example. APRA is a world class regulator. Its role is important. But its role is also changing. And these changes are significant.

APRA is charged with responsibility for prudential regulation, not macroeconomic stability, nor financial system stability.

Yet APRAs role in helping to manage risks building up in the housing sector has increased relatively dramatically in the past couple of years, with the implementation of macro-prudential policies.

I support macro-prudential responses, but it is important to understand that it is arguably more macro than prudential.

APRA has a role in helping the RBA manage systemic risk and the risk of volatility in macroeconomic activity, not just health of the balance sheet of particular institutions.

As the RBA has maintained historically low official cash rate settings, concerned about weak business investment, and not wanting to add to upward pressure on the Australian dollar, macro-prudential regulation has evolved to facilitate macroeconomic fine-tuning.

It seems that macro-prudential regulation today, conducted by APRA, provides a set of monetary policy instruments at least as important as the official cash rate.

First we observed in 2014 the 10% speed limit for growth in investment loans which was executed by APRA, causing the banks to charge higher interest rates on investor loans, even as the RBA was reducing the official cash interest rate.

Since then weve seen APRA announce a new round of measures to cap the amount of mortgage lending for interest only loans which have seen rapid growth in recent years.

And in the recent budget, the use of macroprudential policies to manage economic risks has become even more pronounced, with the Treasurer announcing he would modernise APRAs powers by explicitly allowing it to differentiate the application of loan controls by location.

This is another substantial change.

We know the Reserve Bank is sometimes faced with an unenviable conundrum: the fact that exercising the traditional lever of monetary policy might lead to an appreciation in the Australian dollar.

APRAs new tools are not as blunt as the cash rate, and they come without the downside risk of affecting foreign exchange markets.

But these developments have arguably blurred the lines of institutional accountability in ways that were not anticipated by the Financial System Inquiry, and certainly not contemplated by the Wallis Inquiry many years earlier.

In this context, the Council of Financial Regulators is an important body.

But a somewhat opaque one, with no formal transparency obligations, minutes or publications.

It wasnt that long ago that the Reserve Banks deliberations were quite opaque as well.

Governor Stevens took action to release interest rates decisions in a more timely fashion and to publish Board minutes, to increase substantially the public visibility around Reserve Bank deliberations.

With the Council of Financial Regulators now seemingly taking an increasingly important role, it strikes me as time to examine whether more transparency in its deliberations wouldnt be a similarly useful development.

Recent moves by the government to give APRA new powers around conduct raise similar issues. In my view, there is now some blurring of accountability between APRA and ASIC.

Since the Wallis Report in the late 1990s ASIC has had as part of its remit to promote confident and informed participation by investors and consumers in the financial system.

ASIC has powers to protect consumers from unethical and inappropriate conduct in the financial services industry.

But the establishment of the recent Banking Executive Accountability regime on the back of the Coleman report has blurred the roles of APRA and ASIC.

Under the new accountability arrangements, APRA will be given new powers:

• Where new prospective executives and directors need to be registered with APRA
• to remove directors and senior executives from APRA-regulated institutions; and
• to penalise ADIs if they are not appropriately monitoring the suitability of executives.

ASIC has typically led on these conduct issues, but since the budget APRAs responsibilities will now include undertaking similar roles.

I am not suggesting that more oversight of good conduct is not warranted, or that these new roles cant complement ASICs current work.

But a stocktake is warranted.

Transparency around who is responsible for monitoring conduct is obviously an imperative and why we are proceeding with Royal commission.

And reflecting on these issues, its difficult not coming to the conclusion that the Governments refusal to follow Labors lead on a Royal Commission is now having more far reaching and unintended consequences for our broader financial architecture.

Of course, responsibilities for monetary policy and for appropriate executive conduct are just two examples of the changing financial system architecture.

Just in the last couple of weeks, there have been other developments:

• APRA has announced how it intends to implement the FSIs recommendation to ensure banks are unquestionably strong;
• The outgoing Chairman of ASIC has continued to express concern about hybrids and CFDs;
• New powers have been flagged for APRA to deal with shadow banking and non-bank lenders; and
• The RBA has released its forex code.

These changes taken together add to the impression that our framework of financial and prudential regulation is changing in an ad hoc fashion, in contrast to previous changes which followed more considered system wide inquiries.

And there is a final consideration which leads me to the conclusion that a review of our financial regulation is needed: the increasing rise of fintech and its implications.

Take just ApplePay and Blockchain alone. These were unthinkable at the time of Wallis. They did recent some attention in the Murray Report. But this is an area that warrants a regular close eye given the rapid change occurring.

Lets be clear, Fintech provides great opportunities, it is a positive development. But it is a development that needs to be considered in relation to our financial regulation architecture.

PWC report noted, the accelerating pace of technological change is the most creative forceand also, the most destructive onein the financial services ecosystem today.

The report forecasts that by 2020, growth in the sharing economy, blockchain, customer intelligence and cloud computing will be among the technologies that transform finance.

Importantly, PWC also notes that regulators will turn to technology too, with fintech allowing them to use big data techniques to spot problems earlier, as well as shaping how regulators conduct stress tests and a asset quality reviews.

So there are compelling reasons for a thorough examination of all aspects of financial regulation in Australia.

The Royal Commission will be a good opportunity, a vital opportunity to do so.

We will appoint thoroughly credentialed, experienced and respected royal commissioners.

Well have well-framed and appropriate terms of reference, and well give its recommendations all the proper weight that the recommendations of a Royal Commission should receive.

This brings to my final point.

One of the reasons I so want the architecture of our financial regulation to be worlds best practice is that I want Australias financial services industry to be successful not only in Australia, but on the global stage and in our region in particular.

Ive had the opportunity to speak at FSC conferences many times over the years about the importance of growing financial services exports.

More importantly, Ive had the opportunity to engage with the FSC executive and members intensively on what more we need to do.

Ive been lucky to hold, over the years, a series of portfolios in which Ive been able to keep my active interest in promoting Australias financial services exports.

In Government, I commissioned Mark Johnson to review our regulatory settings to ensure we were doing everything possible to promote financial services exports.

It was an excellent report, and much of it has been implemented. We started the process and the current government has continued it.

But we need to do much more.

And while Ive held several portfolios in which I can promote this interest, as Treasurer Ill be able to promote the export performance of our funds management and financial services industry from the Treasury portfolio directly.

There will be much to do.

We will need to quickly conduct a stocktake of progress on the Johnson recommendations and refresh them, eight or nine years on.

I want to work very closely with the FSC as we do so.

I see this project as sub-set of the broader task of improving our economic engagement with Asia, and with ASEAN in particular.

In Australia, we pay the Asian century lip service.

We need a step-change in how we as nation treat the opportunities of the growing middle class of Asia.

The case for doing so is, I believe, self-evident.

I dont have time today to go into the full nature of the opportunities, where we are falling short or what we need to do. I have dealt with some of these issues in previous speeches and intend to say a lot more about it coming months.

But let me share just a few quick facts with you which sum up the scale of the opportunities but also the task:

• In the next fifteen years, four of the worlds five largest economies will be in Asia.
• Indonesia will be the worlds fifth biggest economy overtaking the UK, Germany, Russia and France.
• China will add another 850 million people to its middle class by 2030

And for the bad news:

• More Australian students were studying Bahasa Indonesia in 1972 than are doing so today
• In 2016 in NSW, 1.8% of HSC students studied Japanese, 1.2% studied Chinese, 0.2% studied Indonesian.
• The number of board directors and senior executives in Australia with Asian language and business literacy is lamentably low.
• And a far reaching body of work the Australia in the Asian Century, a report into Australias future in Asia gathering dust instead of being implemented and built upon.

In the Opposition, we have already laid out a number of ideas to improve the quality of our economic engagement with Asia and with Indonesia and South East Asia in particular.

We have a lot more to do and announce, and we have a lot more to say.

And I have an invitation for you. If the FSC, any member any individual here today, has an idea they want to put to me about to lift the economic engagement of this sector in Asia, Im all ears and happy to hear it.

And I look forward to working with you on policy implementation, trade missions and other opportunities for lifting our financial services exports performance.

In the Opposition, weve been doing a lot of thinking about the tasks that will confront us on coming to office and the mandate we need to seek to tackle the challenges and opportunities facing our country.

We have been outlining detailed policies and will continue to do so. We are providing the most detailed and comprehensive plans of any opposition in decades.

Weve shown we are prepared to be adventurous when it comes to policy and bold when it comes to what we are prepared to put before the people for judgement.

The Australian political debate is very robust at the moment. But politics is about more than polls, and personalities. It must be about vision and achievement.

We face the next election confident in our plans and determined to tackle the challenges and opportunities before us.

The nation deserves nothing less and I look forward to working with this sector as we do so, in Opposition and in Government.